WASHINGTON (MNI) – The following is the Beige Book’s summary of
First District economic activity, published Wednesday:

Business activity in the First District continues to expand
gradually. Contacts in manufacturing, software and IT services,
staffing, and commercial real estate seem more upbeat than six or 12
weeks ago, while retailers continue to give mixed reports, and
residential real estate markets remain soft. Labor demand is improving
somewhat, with most contacted sectors undertaking modest net hiring.
Some firms report raising prices or wages and complain of selected
increases in non-labor costs, but most say they are holding their prices
and wages stable. The outlook for 2011 is slightly more optimistic than
last time, with somewhat less reference to downside possibilities.

Retail and Tourism

First District retailers report mixed sales results for the fall
months. Year-over-year same-store sales range from decreases in the low
single digits to increases in the low single digits, with several
contacts reporting flat sales. The majority of contacted retailers
expect a highly promotional holiday shopping season yielding modest
sales increases. Inventory levels are mixed, but generally in line with
expectations. One respondent notes that cost pressure from reduced ocean
freight capacity has abated, while another reports increasing price
pressure from rising fuel costs. Headcounts continue to increase; these
increases primarily reflect new store openings, although some firms are
staffing up for the holidays. One respondent cites increased wage
pressures. Retailers note significant cost increases for commodities,
particularly cotton, liquid sugars, and nuts. Outlooks range from
cautious to cautiously optimistic, with most contacts making less
mention of downside risks than in earlier conversations.

Travel and tourism in the Boston area is strong. One contact
attributes the trend to generous travel incentives and perceived value.
Leisure travelers are reported to be taking more frequent short
vacations rather than fewer long trips. The tourism outlook is seen as
positive as long as the promotions continue.

Manufacturing and Related Services

Nearly all contacted manufacturing firms are relatively upbeat
about their current activity levels. Firms in the semiconductor sector
continue to report particularly robust sales growth in the third
quarter, and manufacturers who sell components for automobiles and other
machinery also report relatively strong revenue growth. A couple of
manufacturers note that their sales are on pace with the very strong
results they posted in the fall of 2008, prior to the economy’s
deterioration. Other firms indicate that their sales figures have
weakened somewhat relative to the first half of this year, but are still
strong relative to 2009. Most responding firms express less concern now
than at the end of the summer that sales growth has plateaued and/or
could diminish.

Inventory levels at most contacted firms have risen a bit since the
second quarter, either to correct undue reductions made in response to
the economic downturn or to limit future supply disruptions. One firm
notes that its inventory levels are back on plan after being low for a
few quarters because of a dramatic increase in orders. Some
manufacturers say their suppliers continue to operate at capacity and
are still slow to provide necessary production materials. These
continued tight supplies along with rising oil and metals prices have
created input cost pressures for selected firms. To offset their higher
costs at least partially, these manufacturers (most of whom are
intermediate-goods suppliers) have either raised their selling prices or
plan to do so in the near future; one firm plans to raise prices from 4
percent to 6 percent, expecting that only about half of the increase
will stick. Notwithstanding these exceptions, responding manufacturers
characterize selling prices as relatively stable.

All but one of the contacted companies reports stable to increasing
employment. The number of recent or planned hires at individual firms is
not large, but they say business is good and they need more staff to
handle the increased demand. Nonetheless, employment remains well below
2008 levels at most firms. In addition, capital expenditures currently
remain in line with plans and most firms expect little if any change in
capital spending for 2011.

Responding manufacturers generally expect growth to continue at a
reasonable pace heading into 2011, although a few say they think 2011
may not be quite as strong as 2010. Indeed, some uncertainty continues
to surround the outlook for next year. A number of firms, however, are
somewhat less cautious when discussing the prospects for next year than
they have been in recent conversations.

Software and Information Technology Services

New England software and information technology contacts report
that business continues to improve, with year-over-year revenue
increases ranging from mid-single digits to over 20 percent in the most
recent quarter. Increased activity has led most respondents to continue
raising their headcounts. One contact is adding positions across the
board, reporting a 10 percent increase in staff year-to-date; another,
by contrast, reports a modest reduction, with a number of customer
service and information technology positions being sent overseas. Prices
are holding steady, although most respondents report that strong
discounting pressure still exists. Capital and technology spending is
relatively unchanged, with only one contact reporting an increase in
outlays. Respondents are generally more optimistic than they were three
months ago. With strong order pipelines, most are expecting a
continuation or slight acceleration of their current rate of growth in
early 2011.

Staffing Services

A majority of New England staffing contacts report that business
continues to expand. Most contacts describe business since the end of
the third quarter as “good” or “slightly improved,” citing revenue
growth in the single-digit range, although a few have experienced
inconsistent activity in recent months. Year-over-year revenue changes
range from flat to up more than 30 percent. Labor demand has
strengthened, particularly in the information technology, medical,
manufacturing, and legal sectors. Labor supply is starting to tighten,
with contacts reporting increasing difficulty in finding qualified
candidates, especially for high-skilled jobs. In response, many contacts
have strengthened their recruitment efforts and some have expanded their
sales forces. Jobs remain hard to fill from the demand side as well: an
elongated hiring cycle persists, with many clients still reluctant to
hire. Some respondents continue to express concern over rising
employment-related costs such as UI and workers’ comp. Despite these
concerns, staffing contacts remain generally positive in their outlook,
predicting faster growth in 2011.

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** Market News International Washington Bureau: 202-371-2121 **

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